After a stunning 2013 that saw its share price rise by 62%, 2014 has been somewhat disappointing for BT (LSE: BT-A). Thats because the companys share price has largely tracked the FTSE 100 during the course of this year and is flat year-to-date.
However, could 2015 turn out to be a repeat of 2013, with BTs share price soaring to higher highs? Or, will 2015 prove to be a carbon copy of 2014, with more lacklustre performance ahead?
Growth Potential
A major appeal of BT for many investors is its relatively reliable growth numbers. Indeed, over the last five years, BT has been able to increase its bottom line in every year, with it growing at an average rate of 12% per annum during the period. While the current year is set to be something of a disappointment compared to recent years, with earnings forecast to grow by just 3%, the longer term looks very bright for BT.
Evidence of that potential could be seen in the companys recent update, with BTs superfast broadband continuing to dominate the wider market and one in three of the companys retail broadband customers now enjoying superfast speeds. Furthermore, earnings growth of 7% for next year shows that BT is set to bounce back from 2014s slower growth rate. Thats despite the companys cost base having the potential to rise next year as a result of commitments such as the exclusive rights to screen Champions League football, which will cost 900 million over three seasons.
Valuation Prospects
Despite BT having a strong track record of growth and being forecast to increase its bottom line by 7% next year, its shares still trade at a discount to the wider market. For example, BT has a price to earnings (P/E) ratio of 13, while the FTSE 100 has a P/E ratio of 15.1. Therefore, there could be as much as 16% upside in BTs share price simply from an upward rerating taking place over the medium term so that its P/E ratio matches that of the wider index. Furthermore, BT also has the potential to trade at a premium to the wider market due to its relatively stable earnings growth profile, which could push its share price even higher.
Looking Ahead
While the UK pay-tv and broadband market is undoubtedly becoming more competitive, with incumbents such as Sky and Virgin Media as well as an anticipated new entrantVodafone, competing with BT for new business, there is still tremendous potential for growth. For example, BT is successfully differentiating itself from competitors by having exclusive rights to a number of sporting events, such as Moto GP, Premier League football and Champions League football.
As a result, this allows it to compete on more than just price and, as Sky has successfully done over the last two decades, means that margins can be maintained at relatively high levels, which is clearly positive news for BTs bottom line. As a result, and while 2014 has been a disappointment, 2015 could be a superb year for investors in BT, with the company having the potential to beat the FTSE 100 over the next 12months.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended shares in BSkyB. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
